You Can, I Can, We All Can For Nissan

The recent decision by Nissan’s CEO, Carlos Ghosn, to locate production of the new Qashqai and X-Trail at the Sunderland plant in the UK provokes some thought. In particular, exactly what decisions are being made within the UK government, as well as exactly what was agreed when Ghosn met Theresa May at 10 Downing Street recently.

Hitting the Brakes

At the Paris Motor Show earlier this month, Mr Ghosn threatened to cut investment into Nissan’s Sunderland manufacturing plant if no compensation was given by the government for costs borne as a consequence of a hard Brexit (an exit from the Customs Union and Single Market). For instance, costs that would now be added to exports from the “independent” UK into the EU. With such a large proportion of production being exported to the EU (something on the order of 80%), some kind of compensation or guarantee would be required by any sensible Chief Executive.

Indeed, some kind of firm assurance is exactly what appears to have been granted. Mr Ghosn spoke yesterday (27 October 2016) of the assurances and support of the UK government to ensure the Sunderland plant remains competitive.

Some Scenarios

There are roughly four scenarios here:

The UK Government will be compensating Nissan for tariffs which their exports to the EU will face as a result of the UK being out of the EU Customs Union and Single Market.

The UK Government has provided assurances to Nissan that they will actually be retaining Single Market or perhaps Customs Union access, despite the current political noise.

The UK Government has convinced Nissan that it can pull off a good deal which will protect their export interests.

Even when factoring in the cost of tariffs, it would be profit-maximising to locate the plant in Sunderland.

The first scenario is possible and, while it would potentially be breaking EU rules on state aid, that wouldn’t matter as the UK would be safely out of the EU. It may, however, also contravene WTO rules on subsidies which means it is perhaps unlikely that this is the case, as countries could simply enact countervailing duties and make the exports uncompetitive again. However, in July, current Brexit Secretary David Davis noted that the UK could implement a range of measures to keep the industry competitive, including tax breaks and “research support”.

The second scenario is the one which is of particular interest. While Theresa May’s rhetoric certainly suggests that the UK would like to retain Single Market access while still restricting immigration, it’s likely that this won’t pan out. For the EU, free movement of labour is a crucial pillar of the Single Market. Remaining a member of the Customs Union also seems unlikely – May has specifically set up a Trade Minister role in her cabinet, effectively signalling that she intends for the UK to negotiate their own trade agreements. In our view, some sort of select free-trade agreement will be negotiated with the EU. Considering the volume and value of vehicle imports from the EU into the UK, the UK certainly has leverage to negotiate a tariff-free agreement on vehicles.

The third scenario is relatively unlikely – as mentioned above it is doubtful that the Nissan Chief Executive would base his capital investment decision on a flimsy hope that the UK government will negotiate an excellent deal with the EU who, arguably, has an interest in making the deal as punitive as possible.

The fourth scenario is unlikely given Mr Ghosn’s own words about needing compensation, but is not impossible. Firstly, there may be internal factors and existing deals which simply mean that it would still make sense, from a business point-of-view, to invest in the Sunderland plant. Secondly, the weaker Pound (almost 15% weaker against the Euro since the Brexit referendum) might still mean that production is competitive.

Driving a Hard (Brexit) Bargain

In closing, perhaps the most likely scenario here is a bit of everything. Theresa May has spoken of an industrial strategy and perhaps this is it – negotiate a good free-trade deal with the EU in the sectors where they have the most leverage, provide tax incentives to industry (in the event that they do not secure a favourable deal) and bank on the weaker Pound keeping the export sector competitive. In our opinion, the take-away from this whole event is that the UK will not be a part of the Single Market or the Customs Union (unless significant concessions are made on the EU’s part) and that Theresa May is simply setting the negotiation bar high with her current rhetoric.